Rolls-Royce's progress powers share price rise

LONDON (Reuters) - Rolls-Royce (RR.L) said it was on track to meet its 2020 goals after beating forecasts last year, providing evidence that CEO Warren East’s plan to rebuild one of the biggest names in British manufacturing was paying off.

East has been trying to reshape Rolls during his three years in charge after declines in some of its older aero-engine programs and plunging demand for oil equipment hit it hard.

The company stuck to a goal of generating free cash flow of 1 billion pounds by around 2020, despite the impact of a costly program to repair its Trent 1000 engines.

“Looking at today’s announcement, we sense the Rolls-Royce story is finally coming of age,” said Jefferies analyst Sandy Morris, who has a “Buy” recommendation on the stock.

Rolls said it would continue with a cost-cutting strategy, adopted as part of the turnaround, after an earlier plan saved about 200 million pounds over the 2015-2017 period by cutting layers of management and shortening manufacturing times.

“The reality is there is more simplification that we need to do to make ourselves truly competitive and fit for the future,” East told reporters on Wednesday.

He declined to put a figure on savings from this latest plan but said it would remove duplication and result in “significant cost reduction”. Some 600 senior managers left the company after the initial restructuring.

DIVIDEND BOOST?

The strong performance in 2017 was driven by a jump in engine deliveries and higher maintenance volumes. Rolls also reported rising sales in its power systems business, which makes engines for use in trains, agriculture and mining.

FILE PHOTO: A Rolls-Royce engine of an Airbus A350-900 of Ethiopian Airlines is photographed during a site-inspection at Fraport airport in Frankfurt, Germany, May 22, 2017. REUTERS/Kai Pfaffenbach /File Photo

“We’re seeing this as an encouraging set of results,” East said.

Hargreaves Lansdown analyst George Salmon said the performance should convince any investors still skeptical about East’s plans and the results raised hopes about the dividend, which the company had halved in 2016 to shore up its finances.

“The chances of Rolls-Royce meaningfully increasing its returns to shareholders in the years to come look much better now,” he said.

Rolls paid out 11.7 pence per share for 2017, unchanged from the previous year.

ENGINE REPAIRS

Rolls would take a hit of about 340 million pounds this year to account for the cost of carrying out repairs on existing engines, primarily the Trent 1000 installed on Boeing 787s.

“Clearly the engine issues are significant,” said East.

“However, we are being transparent with our customers, we’re being transparent with the market. We’re prioritizing resolving the situation for our customers. We have our arms around the solution.”

Rolls has said that 400 to 500 Trent 1000 engines were affected by problems with components wearing out earlier than expected, needing extra inspection and maintenance.

Air New Zealand, British Airways, Virgin Atlantic and Japan’s ANA Holdings are amongst those affected.

For 2018, Rolls forecast group underlying operating profit of about 400 million pounds, give or take 100 million pounds. At the lower end of expectations that would represent a decline from its 2017 level of 321 million pounds.

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That broad guidance was issued under a new accounting standard, which changes how the company books earnings on long-term contracts.

Another part of East’s turnaround plan is the potential sale of the Rolls-Royce’s loss-making commercial marine business, the part of the business which designs and makes equipment used in oil and gas extraction.

“At this stage there’s no new news, we’ll update you when we’ve got something to talk about,” Chief Financial Officer Stephen Daintith told reporters, adding that the update could come in May at its annual meeting or in June at an investor day.